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IRA for my daughter

Our 18 year old daughter started working as an intern this year, while studying in college, and is expected to earn about $6,000-8,000/year. This is definitely great as it partially offsets her college expenses (about $25,000/year), that we are paying. However, this also increases our family income and I would like to see if we can reduce the tax hit. I am sure this is a common occurrence and hope the knowledgeable folks here can guide me, as my knowledge of these tax issues is very limited.
1. We filed as married joint for 2009, with my daughter as a dependent. Will that still work for 2010, now that she has a substantial income? 2. We are not eligible to contribute to ROTH because of our high income as a family. If my daughter opens a ROTH, does she need to file a separate tax return? In that case, I believe I cannot claim her as a dependent. 3. If we are paying for her college education, is this considered as some kind of gift which is taxed?
Thank you for all your help.
Kaspa
Reply to
Kaspa
My understanding in general is that a dependent is someone who relies on you for the majority of their support, e.g. for housing, food, clothing, etc.. The $25k outweighs the $8k, and eighteen years old going to college ...? She's dependent on you.
Paying college costs is not considered a gift that I know of. The specifics are worded much more elegantly as I recall, but my understanding is that anyone can pay for anyone's college, and it is not considered a gift for tax purposes.
Whenever possible, refer to the IRS instructions. On this subject, they are not hard to read, and you can ask the IRS anonymously for specific instructions you are unable to find on their site. Sometimes even paid professionals (not me)get things wrong, so it's a good idea to read on your own.
Who must file? is a start:
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IRA (go to publication 590)
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dependents (surprisingly clear and concise)
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"1. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether or not you must file a return depends on several factors, including the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and, any advance Earned Income Tax Credit payments you received."
Reply to
dapperdobbs
Kaspa writes:
One important thing up-front...
You appear to have a serious misconception that someone cannot be claimed as a dependent if they file their own tax return.
That is not the case.
Further, once your daughter turned 14 her income no longer[*] shows up on your joint return -- even if you wanted it to. In fact, if she had enough income that it has to be accounted for on a tax return she must file her own return once she's 14.
And $6000-$8000 of W-2 income means that she will have to file her own tax return. She will have to do so whether or not she is eligible to be claimed as a dependent.
[*] With the extension of the kiddie tax rules to cover young adults the tax RATE on some of her income may be derived from your return, but none of her income will show up on your return.
her own return no matter what. As I noted above, the act of filing her own return does not affect whether or not you can claim her as a dependent. See Pub 17 or the Form 1040 instructions for the tests to see if she is an eligible dependent.
If the tuition payments are made directly to the school they are exempt from the whole gift tax scheme (don't even have to be reported on a gift tax return).
Reply to
Rich Carreiro
Yes.
Most likely, your daughter will have to file a return no matter what. In 2009, Dependents must file a return if they had earned income > $5,700 (see 1040 instructions). However, you can still claim her as a dependent.
No. Quite the opposite, you may be to realize some tax benefits for paying her tuition. There are 3 different credits for higher education expenses. And if you don't qualify for any of those, you still may be able to deduct tuition and fees. Any decent tax software will work out all the possibilities and tell you the best choice.
--Bill
Reply to
Bill Woessner
You've received good advice about everything but opening a Roth IRA for your daughter. Since she has earned income, she will be eligible to open a Roth in her own name. If she is the responsible type, who wouldn't take the money out early, this could be a great start to her retirement savings. For example, if she contributed $5,000 to a Roth IRA and it earned 5% over inflation for 50 years, the result would be the equivalent of $160,000 of today's dollars, tax free, when she turns 68. Depending on her standard of living, that one contribution could fund two to four years of her retirement!
Dave
Reply to
Dave Dodson
1) Your filing status has no impact on whether child is a dependant or files a return
a) child is a dependent if they meet the dependency tests (someone else provided more than half her support, related to you, not a qualifying child of someone else...) b) child must file a tax return based on income- if income is more than ($3650??) she must file a tax return. Even if income is LESS than $3650 she could still file a return if she wanted to claim a refund of taxes paid, BUT she is not REQUIRED to file a tax return until income hits a certain level (two different tests here, one for earned income, and one for unearned income). She meets the earned income test therefore she needs to file.
2) Check the rules for a Roth. I believe the requirement is a valid SS and earned income. There are income limits for filing as single. If you wanted to reduce tax hit, consider a traditional IRA and she can tax a tax deduction, but I also think her tax bracket is 10%, so Roth is a good bet (her tax bracket goes up from here).
3) college education expenses are part of support (see dependency issue and support test for #1). You may or may not be able to claim the college expenses as a tax deduction or tax credit. The college expenses follow the dependency (if you claim the dependency, only YOU can claim the tax credits, if daughter claims dependency, she can claim the college tax credits).
Focus on the dependency first- that will change the tax situation most. Many things follow the dependency (tax credits and similar).
For example, if daughter claimed her dependency, she might also claim the EIC if her income is low enough (higher refund). But she needs to meet the dependency tests to know if she can claim her own exemption.
Reply to
jIM
Very good posting, I am sorry I don't have anything to add here, I learned a lot since I am going to be in the similar situation soon. Thanks for your post.
Abid
Reply to
Abid Khan
Thanks to each and everyone who replied. Very informative! I will definitely read the publications that you recommended.
Reply to
kaspa

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